Loan to value ratio (LVR)
“This is the ratio of the loan amount you borrowed to the price of the home you purchased. A low LVR is favourable as the lender sees you as a less risky borrower and removes the need to pay LMI.”
Lenders mortgage insurance (LMI)
“Lenders mortgage insurance is a fee lenders charge borrowers who have low deposits. It’s important to remember that LMI protects the lender, not the borrower in the event that the borrower defaults and can no longer make their repayments. An LMI is calculated based on a number of factors including:”
- the size of your loan
- your deposit amount
- if the property is for investment or personal use
- employment stability
- your lender’s insurer
Refinancing
“This is simply the process of replacing an existing mortgage with a new loan. Homeowners generally choose to refinance to reduce repayments, lower their interest rate, or change their loan features.”
Stamp/transfer duty
“A one-off fee that must be paid upfront when you purchase your property or land. As this is a state and territory tax, this cost varies depending on where the estate is located. However, some first home buyers may be eligible for a concession, which also varies based on location.”
Pre-approval
“A home loan pre-approval is an indication that a lender is likely to approve you for a home loan, for a fixed amount, based on your current financial situation.
Fixed interest rate vs variable interest rate
“You can choose to pay the interest on your loan in a number of ways. Ask yourself whether you require the stability of a fixed rate over the flexibility of a variable rate.”
Variable rate loan
“These loans have variable interest rates that rise and fall with market rates. These loans generally give you the option to make extra repayments.”
Fixed rate loan
“Loans with fixed interest rates have a set interest rate, generally for one to five years. Keep in mind you won’t be able to benefit from falls in interest rate and they can be costly if you want to refinance during the fixed rate period.”
Split loan
“You may also want to consider a split loan which is essentially a combination of a variable rate loan and a fixed rate loan. “
Principal and interest repayments vs interest only repayments
“How you repay your loan can have a big impact on your finances. You’ll be asked if you want to make principal and interest repayments, or interest only repayments.”
Interest only
“Here, you are only paying off the interest charged on your loan, rather than the loan itself, for a set period of time (typically one to five years). It generally means you’re not repaying the loan at all in this period and will pay more interest in the long run.”
Principal and interest
“This consists of both the amount you initially borrowed (the ‘principal’) and the interest (or cost of borrowing). This option means you pay less interest overall and will own your home outright sooner.”
Redraw facilities and making extra repayments
“Redraw facilities let you make extra repayments and then access these repayments at a later time if you need the funds. It’s worth noting that fixed rate loans typically don’t have extra repayment functionality.”
Home loan portability
“If you think you might move home in the next few years, a home loan with this feature will allow you avoid break cost fees if you want to hold onto your loan when moving to a new property.”
Repayment holidays
“A small break period from making repayments when your cash is needed elsewhere, such as taking time on parental leave.”
Repayment frequency and schedule
“More frequent repayments, such as fortnightly rather than monthly, can mean a saving in interest in the long run since lenders calculate interest daily. Remember to choose a repayment schedule that suits your own lifestyle and income.”
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